Frankfurt’s way promises no hope for battered Irish economy

ENDA Kenny’s presidential address to the Fine Gael conference included the obligatory sentence: “Ireland will not default on its debts”.

They refuse to get it. Ireland is marinated in debt at every level. These debts are unaffordable. Whether it’s promissory notes, tracker mortgages or Eircom, the solution will require, sooner or later, debt restructuring. Debt deferral only buys time. For Ireland’s economic recovery and societal salvation to be achieved we have to face our problems with honesty. The same scriptwriters that convinced Brian Cowen, that a sovereign bailout was avoidable, have persuaded the cabinet that economic growth can lead us to debt sustainability. They were wrong then and are wrong now.

In Greece and Portugal the official language, softly but subtly changed. Instead of the ‘no default’ mantra it’s finessed into no ‘disorderly’ default. The difference being that it is done by mutual agreement with the EU Commission, ECB and IMF. Of course, unilateral reneging on our liabilities can’t be achieved. Bilateral renegotiation on promissory notes has been underway for months. The prize for being the best bailout boy in class, or the only PIGS state to re-emerge in the markets, hasn’t impacted on the ECB. They have conceded nothing in return for the Irish taxpayer recompensing senior bondholders in full for bust closed banks — they failed to adequately regulate.

What was achieved last week by immediate non-repayment of €3.06bn of IBRC liabilities? No discount, no burden sharing, additional costs of €90m (an interest holiday was abandoned) this year and no agreement to refinance the €31bn (plus €17bn interest) through the EFSF or ESM at 4%, rather than 8%. Other than very short-term cosmetics, this face-saving exercise represents a complete failure to confront the ECB. Marginal extra wriggle room on the cash flow drawdown of troika funds is the only gain. Frankfurt’s hard line makes a mockery of FG and Labour pre-election promises. The funny money solution involving Nama and Bank of Ireland has no impact on our sovereign debt/GDP ratio and offers no imminent prospect of reducing the overall size of IBRC bailout costs. The ECB has signalled they won’t be taking their feet off our throats any time soon.

Prof Morgan Kelly correctly predicted that the mortgage crisis represented the next horror to undermine our financial institutions. Yet again, his prophecy is on the money. 2011 annual accounts for AIB, Bank of Ireland and Permanent TSB reveal glimpses of how the property crash, with up to 60% house price declines, will destroy their balance sheets. The Irish mortgage market is facing meltdown. One in eight mortgagors failed to make any repayments in three months. AIB’s house loans amount to €42bn, with €10bn comprised of buy to let house purchases. B of I’s mortgage book is in overall negative equity, with €15.3bn of asset collateral not fully realisable. Patrick Honohan says banks should foreclose on non-owner occupiers through repossessions and enforced sales. Codes of practice should be discarded. This will drive house values down, but is unavoidable.

Tracker mortgages, many of which are based on interest only repayments currently, are causing operating losses. Competitive costs of deposits mean that there is a built-in negative differential between repayments and costs of funds. The Irish Brokers Association recently completed a study which indicates that the capital write down, if now crystallised, on tracker losses is equivalent to 25% impairment on the loan value. This means if IBRC was to take over the entire €40bn tracker mortgage liability, banks would have to be recapitalised by an additional €10bn. The worst case scenario postulated by Blackrock consultants a year ago may have underestimated ultimate refinancing needs of our indigenous institutions.

Negative equity mortgages, allowing families to trade up or down, represent a palliative measure for perhaps only 2% of problem cases. 125% house loans to current market value means piling more debt on over-indebtedness. Keane Report, mortgage to rent conversions, personal insolvency legislation and mortgage/income tax relief were advanced by Enda as his response to the mortgage crisis. Every conceivable avenue is considered before the ultimate realistic resolution. In the US lenders have no ability to pursue debts on houses beyond foreclosing on the property. Return the keys and sell the house. The balance is written off as debt forgiveness. Can’t pay/won’t pay circular debates become irrelevant. You forfeit your home, any renovations and original equity. It allows debtors and creditors to move on. The market stabilises.

The High Court confirmed on Friday how entities that are too big to fail, can overcome insurmountable debts. Eircom has 1.1m customers, ownership of our nationwide telecommunications infrastructure, 3,000 suppliers and 6,400 employees. The dislocation arising out of its demise is too great to countenance. Their gross corporate debt is €4.1bn. They can’t repay interest costs and capital. Examinership facilitates debt discounts of €1.76bn. Secured creditors, senior and junior bondholders, had no choice but to swap debts for equity. After 100 days, the business can discard its past legacy debts. €1.3bn can be invested in upgrading the fibre network to establish next-generation communications. Ireland’s exchequer, also too big to fail, needs a parallel to examinership.

The household charge debacle should have taught the cabinet a sobering lesson in public resistance to tax base broadening. If 50% of households demur from €100 annually, yielding €160mn, what prospect is there of residential property taxes, garnering in excess of €1bn? After seven tough budgets, we have maxed out on VAT hikes. Income tax increases are red line issues. Yet 2012 fiscal arithmetic reads: expenditure €51.7bn versus revenue of €35bn. Bridging the €15bn gap remains to be resolved. Goodbody stockbrokers recently published a table outlining a profile of future Irish sovereign funding. The state needs cash as follows: 2012 — €29.4bn; 2013 — €22.6bn; 2014 — €18.5bn. EU — IMF are set to provide us with €22.9bn this year, €10.1bn next year and nothing thereafter. FG and Labour’s plan to raise €30.6bn from the markets in 2013 and 2014 are not credible.

The national mission statement is entirely dedicated to saving banks. The ECB believes rescuing European banks is more important than sacrificing sovereigns. In return for what? There’s going to be minimal credit in the economy. Accumulation of bank debt upon taxpayers forced us into a bailout programme. The IBRC is fast becoming Nama 2, a toxic skip for tracker mortgages on top of Anglo and Nationwide manure. Another round of bank recapitalisations is ever apparent, if they are to be presentable for outside investors.

Decades of austerity and intergenerational sacrifices are required for hedge funds to buy bank shares at 10 cents and resell them for a euro. Government strategy is not to seek a game changer. This policy of containment is meandering up a cul de sac.

PS: This is my final Irish Examiner column, I wish to thank the editor and staff for the wonderful opportunity over recent years to communicate my views. Long may ‘De Paper’ flourish and prosper.

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